A collection of often sceptical, always candid observations and insights on the US economy and large-cap equity markets. Readers have observed my style and perspective to be that "the emperor has no clothes," and that is reasonably accurate.
Postings reflect my philosophies and perspectives on economics, business and politics.

Saturday, December 30, 2006

I am so glad that I have not been a Ford stockholder. It's a good news/bad news sort of thing. The good news is that Mulally is smart, experienced, determined and energetic. I think it's great for Ford that Mulally is so talented. He does seem like a very competent, capable guy.

The bad news is that his boss, Bill Ford, let things get this bad. Tolerated crony pals mismanaging the firm, and that the board let it happen on their watch.

Now they all want Alan Mulally to work magic and fix the mess.

For example, the article mentions that Mark Schulz,

"Ford's 54-year-old head of international operations...would be changing jobs to a different role, with direct business responsibility...Mr. Schulz, a longtime fly-fishing and ice-hockey buddy of Mr. Ford, retired instead....(and) couldn't be reached for comment."

Sounds too precious, doesn't it? You can almost see Schulz mugging it up with Bill Ford over eggnog at the proper GrosPointe country club holiday parties, wearing pleated slacks festooned with little ice-hockey sticks poking through Christmas wreathes, or fly-fishing rods catching Christmas stockings. This sort of thing drives employee morale into the toilet, I kid you not. Nothing infuriates capable lieutenants more than seeing the Boss socializing off-premises with also-ran managers who clearly curry favor and retain their positions thanks to friendships with the CEO, rather than their own performance or talent.

Meanwhile, Bill Ford let this continue as part of his "management" and "leadership" of his family firm.

In another part of the piece, Mulally is quoted as saying that, when he asked Bill Ford

"why he hadn't integrated the company....every time Ford had considered forcing integration, a new hit product- such as the Explorer, Taurus or F-series truck- would come along and propel profitability without tough changes, explained the fourth-generation Ford leader."

So to cronyism we can add lack of focus and discipline. The board and Bill Ford are hoping to God that Alan Mulally can do the dirty, harsh, odious work of firing loyal, trusting employees, redesigning bloated, dysfunctional corporate processes, and identifying new, hit products. Because for five years, as CEO, and six as a board member, Bill Ford failed to do all of these.

In fact, the Journal article related this exchange between Chairman Bill (Ford, not Gates) and board member John Thornton, former President of Goldman Sachs,

Ford: "Alan's the perfect guy for our situation."Thornton: "I couldn't agree more. Thank God for that, we don't have a second chance. This is it."

What is it with Detroit auto company CEOs? Must they wait until they teeter on the edge of bankruptcy before shifting gears (pun intended)?

Is there time for Mulally to save Ford? Who knows? Is he doing some right things? Unquestionably. For instance, he drives each model of the firm's product line, the better to give it a personal, objective going-over. His comment about the lack of a standard "feel" for Ford cars is absolutely true. My father was a "Ford man" when I was growing up. In models of similar years, the controls were typically located in the same place. You knew you were in a Ford, not a GM car, just by the layout of the dashboard and knobs.The WSJ piece lavishes much print on Mulally's rather unremarkable, if very effective, use of colors and graphic displays to track product-management issues in his 'war room.' That this technique, and his insistence on the divulging by managers of complete and true performance data, is more than shocking. It's disgraceful. Consider what it says about the lack of respect these managers have had for Mulally's predecessor.Oh, wait....that's the sitting chairman......Bill Ford!

Will Mulally's sensible initiatives matter? Truthfully, I doubt they have the time. Still, oddly, I can't but help root for the guy. Maybe in 3-4 years, Ford will make my equity portfolio selection list. Although, my hunch is, not as an independent company. Perhaps as part of an alliance with Nissan. If it merges with GM, I would lower the probabilities of its performing sufficiently well to make my selection list.Either way, 2007 will be exciting for lots of reasons, and Mulally's activities at Ford are just one.Happy New Year!

Friday, December 29, 2006

Bear Stearn's chief economist, David Malpass, wrote a wonderful piece in the Wall Street Journal last week. His topic was how the US deficit is misunderstood and misinterpreted by many observers. In this, he is but one of several to have authored op-ed pieces in the Journal to this effect over the last decade or so.I won't go into detail about the many data items Malpass cites as he conditions his observations in the article. However, this passage is perhaps the piece's best distillation of his message,"The common perception is that Americans drive the trade deficit in an unhealthy way by spending more than we produce. To make up the difference, foreigners ship us things on credit. This sounds bad, but should be evaluated in terms of our demographics, low unemployment rate, attractiveness to foreign investment and rising household savings (my bold)."A little further, he continues,"Growing corporations are expected to be cash hungry. This leverage is treated as a positive for companies, but a negative for countries, a key inconsistency in popular economics. Rather than paying back the debt back, the growing economy rolls the debt over and adds more, just as the U.S. has been doing throughout most of its prosperous economic history. Part of each additional bond offering puts the company and the U.S. in the position of investing more than we save, drawing in foreign investment and contributing to the trade deficit."Together, these passages make Malpass' critical point, i.e., sovereign debt, and/or trade deficits, matter in the context of the country's economic trajectory. In our case, we have the largest, vibrant, resilient and attractive economy in the world. Despite what economic and political gloomsters would have you believe, we borrow at favorable rates because others wish to participate in our economic success. They hold dollars, or dollar-denominated debt, and invest in our country directly. We use that capital to grow. Malpass makes the point further in his article that American household net worth is growing faster than net foreign debt of the U.S.,"meaning foreigners are investing in the U.S. too slowly and conservatively to keep up with our growth."It's a nice problem that we have, actually. Our economy is the envy of the world, which is one reason why even The Economist has sounded like a broken record on this topic for as long as I can recall. Context matters. Context means everything in macroeconomic analysis. By the way, in one of the earlier Journal pieces on this topic, another author cited the late 1800s in the U.S. as a parallel economic period. We had significant growth and a large trade deficit, consistent with heavy imports to fuel our rapidly-industrializing young nation. While Abe Lincoln was right about a lot of things, he was wrong to worry about trade deficits.It goes without saying that this type of nuanced analysis will go over the heads of most U.S. Senators and Congressmen, and probably most Presidential candidates as well.It reminds me of something my father used to frequently say. When listening to yet another media criticism of low voter turnouts in some fall election, he would remark thusly,'Son, you only get to vote once every four years for the President. But you vote each day with your dollars, and those have a much larger and frequent impact than your political vote.'What I think this means, pursuant to this post, is that, despite most politicians, and even most economists, not understanding the real dynamics of our trade deficit, so long as our nation's citizens just continue to drive our economy as usual, the trade deficit will not be any more of a problem in the future than it has in the past.

Thursday, December 28, 2006

I recently discussed my post of last week concerning Home Depot with my partner. In it, I contrasted Lee Cooperman's cheery view of the company, in which his hedge fund has a sizable position, with the rather downbeat view of the firm, based simply upon its sales and NIAT numbers for the past five years. My partner and I wondered how such basic, obvious quantitative evidence could simply be ignored, and/or swept aside, by both Cooperman and Bartiromo.

He asked me if I thought Cooperman or Bartiromo even looked at HD's overall numbers? Or if I thought Bartiromo did anything more than simply reinforce, agree with, and mouth assent to Cooperman's selective factoids? On both counts, I admitted that I doubt it.

It would be one thing for this to occur in the course of private investment determinations. But to air such a shallow attempt at "analysis" on a major business medium such as CNBC seems to both observe the commonality of, and countenance, such shoddy work.

How much of this, do you suppose, goes on? Partial views of company performance? Selective factoid presentations? Skewed, biased 'analysis' in place of a clear presentation of information known to have a significant statistical relationship to the consistent attainment of superior total returns?

As we discussed the Cooperman-Bartiromo interview, we segued into a related matter- the ever-popular Wall Street two year 'training programs.' He wonders how anyone can really learn much of value, when worked to death like his son. A close friend and business associate of long standing also has a son who is about to enter one of these two-year prison camps. His son referred to it as "two years of hell."

I ask a different question,

'How can something which can be learned by anyone, in two short years, be of much lasting and unique value?' If so many go through these programs, how valuable can they be?'

Personally, I don't even think most MBAs learn all that much in two years.

First, consider that many, if not most, MBA candidates enter from non-business fields. So they spend the first year catching up to what a business undergrad spends his or her first two years learning. Then they interview for jobs beginning in the fall of the second year. Having landed an offer, their academic focus typically wanes. From my experience at a Top Five business school, I would estimate that the average MBA candidate actually focuses on learning anything considered 'advanced,' as opposed to simply passing basic courses or studying in their concentration area, for about six months.Does this sound like a recipe for churning out unique, creative, value-adding managers?

Some years ago, I considered returning to my alma mater for a PhD in Marketing, the field in which I studied for my two business degrees. My former mentor and advisor took me to lunch at the Penn faculty club to discuss the idea. While we chatted, I observed that, in the decade or so since I had graduated with my MBA, leveraged buyouts and corporate restructurings had eviscerated almost, if not every, function and sector in corporate America. How could this have been emblematic of a corps of well-trained, competent, creative business grads making their productive and successful mark on the American business world?

He replied that, finally, at that time, circa 1990, MBAs were "finally" having an effect in the business world. Really? Only then?

Take the top five business school programs for the twenty-year period from 1970-90, and assume 500 members for each class. You get roughly 50,000 MBAs being disgorged into the US management ranks just from the top five B-schools alone. No, I think most "two-year" programs, even for intelligent people, don't do much more than provide a rather common, universal business background. The Wall Street programs are more about finance, and less about real "business." The MBA programs seem to be a sort of business "boot camp" to winnow out the less capable, in order to provide a corps of semi-trained people eligible for further managerial 'training.'My proprietary research has shown a remarkably stable average total return for the S&P500 over time. It does not seem to be the case that this influx of business school graduates or Wall Street trainees has enabled companies to return more to their shareholders.Rather, I suspect that it simply provides a large pool of average managers to take their places in mostly non-high-value-adding positions in corporate America. Most of these graduates don't challenge what they've been taught, or even think much about it.Where's the font of uniquely-skilled, creative, motivated business leaders who will make a difference for their shareholders? My guess is, they are rarely cut from the normal B-school or "training program" cloth. It's people with inspiration and ideas, not trained bean-counters and "managers," who will likely invigorate a company and earn its shareholders consistently superior total returns.

The good news, I guess, is that, as these "trained" robots continue to flood the financial markets, I have a sustained flow of similarly-thinking, non-creative counterparties with which to 'trade.'

I find that this sort of 'shoot from the hip,' unconditioned observation, passing as analysis, is all too common on the network. Exactly who did this story help?Institutional investors presumably already know about various international equity markets and their risks. Retail investors are typically advised to participate in markets via country-oriented mutual funds. Even there, reporting on this year's gains doesn't say anything about next year's. While this is always true, I would think it's especially true in thinner, less-well capitalized and transparent markets like those of third-world countries.Once again, the network seems to deliver more on entertainment and less on hard, analytical business or markets news and analysis.

About Me

A well-educated veteran of US corporate strategy positions & hedge fund management, as well as research, product development and project work in consulting, strategy and equity management. Academic background in marketing, strategy, statistics and economics.
Currently own Performance Research Associates, LLC, through which I am involved in proprietary equity and equity options investment management.